A unique research project involving the Accounting Department in The University of Toledo College of Business and Innovation and the Radiology Department at UT Medical Center recently received a $70,000 grant from the United Arab of Emirates University.
“The Impact of Managers’ Supervisory Style on the Relation Between Debt Covenants and Earnings Management: A Neuroscience Imaging Approach” will utilize neuroscientific research in an attempt to capture and understand the behavior of managers in different debt covenant violation situations, and its relation on supervisory styles.
Debt covenants are agreements between banks and borrowers that dictate the way a company manages its finances while indebted to the bank. These covenants are tested on a regular basis during the term of the debt. Violations happen when the company is not meeting any of these covenants.
Dr. Hassan HassabElnaby, associate professor and chair of accounting, said, “We are using a very novel approach to investigate an accounting/business issue. To my knowledge, no study in the area of agency theory and debt contract is utilizing this approach.”
He explained that neuroscientific evidence shows that activities in the ventral striatum of the brain would increase with bad information and decrease with good information.
“We argue that human brains have the ability to implement ‘automatic’ processes of bad and good information to make rational managerial accounting decisions,” he said. “Therefore, we will rely on the functional magnetic resonance imaging (MRI) to capture and encode the neural activity in the ventral striatum. The results of this interdisciplinary study will contribute to the understanding of managers’ behavior and provide crucial implications for the practice and research in management accounting.”
HassabElnaby added, “This type of research is very costly and business research grants are almost non-existent at the required level. While attending an international conference, I was talking with Dr. Ahmed Abdel-Maksoud, a researcher from the United Arab of Emirates University, about a dream research project that I want to do and the difficulty of funding this research. I wrote the basic proposal and sent it to him and other researchers to form a research team. I was lucky enough to have all the researchers I approached interested in the idea, and they made significant contributions to develop the grant proposal. We applied for the grant and last December, we were granted about $70,000 over two years for our research project. Almost $55,000 is budgeted for the MRI experiment that will be done at The University of Toledo’s Medical Center under the supervision of both Dr. Haitham Elsamaloty and Dr. Xin Wang.”
Dr. Amal Said, associate professor of accounting, said, “We are planning on conducting the experiment on 100 subjects. Each subject will have to complete a survey first to capture their managerial style, then their responses to the same nine different debt covenant scenarios will be examined under the MRI.”
Said added, “Earnings management behavior is an ethical question and has been the topic of interest for researchers, practitioners and regulators. We expect that understanding the thinking and decision-making processes of managers can assist in mitigating unethical behavior in the future. The findings of this research project can be incorporated into training material, models and/or packages that are delivered to accountants and business leaders on the role of managers’ personal characteristics (neural activity), the leadership style they follow, and the design and use of management control systems in controlling the suboptimal behavior/practices of managers in relation to firm resources.”
Elsamaloty, UT professor of radiology, said, “I was consulted by Dr. HassabElnaby on the possibility of implementing the study using the imaging tool. I was interested, and we decided to collaborate in this interesting research project.”
He explained that this is a unique study: “We’ll use the high sensitivity and resolution of our 3T functional MRI in evaluating managers under different conditions using different scenarios. We have performed functional MRI research in post-traumatic patients, but to the best of my knowledge, this will be the first study at UT, and possibly in the nation, to evaluate decision-making for managers.”
Wang, UT assistant professor of psychiatry, said, “We completed a study with a kinesiology group from Main Campus in 2011-2013. The research scans increase the use of MRI scanner in addition to clinical use and other studies. It will compete for the limited scanning time, but we will try our best to arrange the scans.”
HassabElnaby said, “We expect the study to take about 18 months and to yield multiple papers. My co-authors and I hope that this study will be a breakthrough and will open new lines of research in accounting, business and other disciplines.”
